Accounting for just under 30% of real GDP and providing 80-90% of state revenue, the oil and gas sector has been the dominant force behind Saudi Arabia’s economy for decades. Seeking to cement its position as a front-runner in the global market, the government has continued to invest heavily over the last decade to boost capacity and develop new resources. The majority of these efforts are carried out via the state energy giant Saudi Arabian Oil Company (Saudi Aramco), which has a hand in virtually all oil and gas development. While Saudi Aramco has considerable sway domestically – all foreign oil and gas outfits looking to do business in the country are required to partner with it – as well as in international energy markets, the world’s largest oil producer still must answer to Saudi Arabia’s Ministry of Petroleum and Mineral Resources (MPMR) and the Supreme Council for Petroleum and Minerals Affairs on energy policy and contractual terms.
While Saudi Aramco dominates the industry, there is still room for foreign players to get involved, according to Sylvain de Lescazes, the president and country representative of Total Saudi Arabia. “Foreign firms can contribute by transferring knowledge in areas where the national oil company does not have expertise, such as deep offshore drilling, as well as by collaborating in research and development to create new procedures and technologies together,” he told OBG.
Saudi Arabia has been shifting its focus beyond increasing its upstream oil production after it achieved its target capacity of 12m barrels per day (bpd), which leaves it with spare capacity in the 2m-bpd range. Subsequently, it has been taking action to develop other areas of the hydrocarbons value chain, in particular downstream refining and petrochemicals, as well as global distribution and sales businesses. It is also expanding its upstream operations to include non-associated gas fields, enhanced oil recovery and other unconventional sources.
Strong global demand for oil pushed 2012 production and profits higher than expected, with national crude output averaging 9.8m bpd through the first eight months of the year, according to data from Saudi investment firm Jadwa Investment. The elevated production rate is an impressive 8.5% higher than the January-August average production run achieved the previous year. Including the near record production levels in April and June that exceeded 10m bpd, average annual output is expected to easily outpace the 9.6m bpd previously predicted by Jadwa, with production levels forecast to remain steady through the end of the year. With higher than predicted demand pushing average export prices up to around $112 per barrel in January 2012 compared to the $100 previously expected, revenues are expected to reach SR1.24trn ($330bn) for 2012 – a 10.82% increase over 2011.
According to the “BP Statistical Review of World Energy 2012”, domestic output was slightly higher in recent years at 11.16m bpd in 2011, up 12.7% over the 9.96m bpd that was produced in 2010, with the US Energy Information Administration (EIA) pegging the country’s production at 11.15m bpd in 2011.
In spite of the recent production bump, the country maintains a comfortable production capacity cushion that allows for output of up to 12m bpd in the event of domestic or international demand spikes. And with proven oil reserves estimated at 265.4bn barrels at the end of 2011 according to the “BP Statistical Review” – 16.1% of the planet’s total stockpile – domestic supplies should remain secure for some time. These petroleum resources are second only to Venezuela’s 296.5bn barrels (17.9% of the global total), and well above third-place Canada’s 175.2bn barrels (10.6%), of which the majority are undeveloped oil sand reserves.
Once simply burnt off in gas flares as an unwanted by-product of petroleum production, the exploitation of natural gas in Saudi Arabia now includes dedicated exploration and production fields. Primarily derived from associated gases found in the country’s vast petroleum fields, all natural gas production is currently utilised on the domestic market for a variety of primarily industrial uses, including power production, water desalinisation and other consumer uses. Over the past decade gas production has increased from 53.7bn cu metres (bcm) in 2001 to 99.2 bcm in 2011, including a 13.2% year-on-year (y-o-y) increase from the 87.7 bcm produced in 2010. And at the same time, Saudi Arabia has posted some of the largest volumetric gains in gas consumption in the world, ranking behind only China in 2011 (which boosted its consumption by 21.5% on the year) with a 13.2% y-o-y bump, and ahead of Japan (11.6% rise), according to figures from BP.
The reason behind the rapid expansion in the usage of natural gas within the Kingdom is two-fold. First, the country’s growing appetite for energy and its economic diversification and industrialisation require increasing amounts of power, leaving the country to consume every cubic metre of gas produced domestically. Secondly, as the government is dependent upon oil export revenues to support its national budget, the domestic usage of alternative energy sources – natural gas in this instance – frees up additional quantities of petroleum for export.
A number of exploratory and development projects have been launched in recent years in an effort to secure a greater supply of natural gas to meet these demands. These operations are primarily based offshore in the Red Sea, the largest being the Karan gas field development (see analysis).
Despite these gains, further increasing the use of natural gas in the domestic energy mix could be difficult. One major obstacle is the availability of proven reserves. Although recent discoveries such as the Karan field are undoubtedly a step forward in this regard, unassociated gas projects remain few and far between in the country at the moment and are not as cost-effective as the numerous land-based petroleum projects, which have established logistical and infrastructure advantages. While Saudi Arabia possesses more than 16% of the world’s proven petroleum reserves, it held just 3.9% of global natural gas stores (8.2trn cu metres), as of 2011. Another factor that limits more widespread use of the fuel locally is the subsidy programme that makes selling the product at the low fixed price of $0.75/ million British thermal units less attractive than selling it on the international market, even in the current environment of depressed natural gas prices.
The biggest player by far in the oil market is the 100%-state-owned Saudi Aramco. Its reserves of 259.7bn barrels of crude oil and condensate as of end-2011 is the largest such stockpile of any single company in the world, and Saudi Aramco’s 2011 production of 3.3bn barrels accounted for 13.3% of all crude raised on the year, according to the firm’s 2011 annual review. These impressive figures are further augmented by its increasing gas output, which averaged 280m cu metres per day for an annual total of 102bcm in 2011. At 8.00trn cu metres, Saudi Aramco’s gas reserves would qualify it as the fourth-largest national reserves in the world behind Russia, Iran and Qatar.
However, as the company is not listed on the Saudi Tadawul All Share Index, its exact value is unknown. The company was valued at around $7trn by the Financial Timesin 2010 on the strength of its reserves, while more conservative estimates place the worth of the company between $2.5trn and $3.6trn. In breezing well past the trillion-dollar mark, Saudi Aramco easily surpasses other global giants, like Google and Apple.
Although much of its value is derived from its substantial reserves, the vertically integrated company also boasts significant downstream refining and petrochemicals operations as well. At the end of 2011 Saudi Aramco was the eighth-largest refiner in the world with a total refining capacity of 4.02m bpd ( including domestic refineries, and domestic and international equity and joint ventures [JV]) and was the world’s top exporter of natural gas liquids.
In 2011 the company succeeded in producing 495m barrels of refined products in the Kingdom – 123m barrels of which were exported. As the country’s oil and gas champion, Saudi Aramco is also responsible for the transportation and distribution of fuel, which the company carries out via a wide array of means, including a fleet of ships, pipeline networks and road transportation. It is also working to integrate additional rail transportation into its network.
Comfortable in the exploration, production and refining of hydrocarbons, Saudi Aramco has recently begun branching out into other business avenues as the country as a whole moves to further diversify its economy. In accordance with Saudi Aramco’s “2020 Strategic Intent”, the company’s statement of its aims for the future, the oil and gas giant is looking to expand the scope of operations past its core competencies into other related businesses, with the ultimate goal of growing Saudi Aramco into the world’s leading integrated energy and chemicals company. With a bountiful supply of feedstock for downstream operations, these industries are a natural fit for further expansion.
Although petrochemicals production is not a new business for Saudi Aramco, the company has invested heavily in recent years to substantially boost its refining and petrochemicals operations. Recent large-scale petrochemicals operations include the development of the Petro Rabigh JV with Sumitomo Chemical, which initiated operations in 2010, and Sadara Chemical Company, another JV established with the Dow Chemical Company to build the world’s largest petrochemicals facility as well as three new 400,000-bpd refineries and associated chemical plants.
In addition to its domestic refining partnerships, Saudi Aramco is also engaged in a number of business partnerships operating refineries around the globe. These include Motiva Enterprises, a JV with the Shell Oil Company for a 325,000-bpd expansion of a refinery in Port Arthur, Texas that was completed in 2012 to make it the largest such operation in the US with a capacity of 600,000 bpd, as well as a deal between Aramco Overseas Company, a subsidiary of Saudi Aramco, and PetroChina to develop a new 200,000-bpd refinery in China’s Yunnan province. In all, the company had partial ownership of overseas refineries with a combined total capacity of 2.01m bpd, as of the end of 2011.
In a bid to bolster its trading capabilities and diversify its revenue stream, in 2011 Saudi Aramco established the Saudi Aramco Product Trading Company, a wholly owned subsidiary created to maximise downstream integration and generate value by leveraging its growing global network of operations. The Dhahran-based company began commercial operations in 2012 to buy and sell products including naphtha, gasoline, diesel and jet fuel, as well as basic petrochemicals.
Finding The Middle Ground
As the world’s largest producer and exporter of petroleum liquids and second-largest crude oil producer behind only Russia, Saudi Arabia’s oil and gas sector is a crucial component of the global financial system. The country’s vast production potential combined with its continued political and economic stability in a region of frequent turmoil have thrust it into a central position within the Organisation of Petroleum Exporting Countries, which has ramifications for the larger global market.
The Kingdom is the global energy market’s central bank that is able to balance supply and demand on relatively short notice in an often unpredictable and volatile market. This role has been tested over the years and has prevailed in the face of a number of challenges, including stepping in to compensate for supply shortages affecting other large producers. Recent examples of this include decreased exports from Iran (holding 9.1% of the world’s proven reserves according to the “BP Statistical Review” that were curtailed due to international sanctions. Before that, conflict in neighbouring Iraq restricted production of its 143.1bn barrels (8.7% of the global total) of proven reserves. In this role, the Kingdom has been able to utilise its excess capacity as a shock absorber to smooth over variations in global oil prices. This ability was on display in the summer of 2012 when Saudi Arabia’s production hit its highest levels in 30 years, topping 10m bpd in response to a curtailment of Iranian output that dipped to 2.85m bpd in August – its lowest level in 22 years.
Some of the production burden is likely to shift in the coming years, however, as Iraq continues to ramp up production to levels not seen there for three decades. This additional output puts the Kingdom in the difficult position of cutting exports to maintain commodity prices while reducing revenues from the strong exports seen in recent years.
Although these actions have consequences for sensitive markets across the globe, maintaining relative stability in international oil production and pricing levels has substantial benefits for Saudi Arabia, as well. With much of the national budget dependent on a steady stream of oil revenues, it remains in the country’s best interest to keep production at a level that maintains profitable prices. But at the same time, it must pump enough crude to avoid an inflationary rise in oil prices to a level that would contribute to international economic stagnation. The nation has also realised that it must be open to investing in other energy options.
Port Of Call
With all the attention being given to alternative energy sources, the fact remains that oil is still a part of the global economy. And while the global usage of oil relative to other sources of primary energy declined in 2011 for the twelfth straight year, it remains the world’s leading fuel source – comprising 33.1% of total energy consumption. In addition, production and consumption increased by 1.1m bpd and 600,000 bpd on the year, respectively, according to BP data. Increases in output from Saudi Arabia, the UAE, Kuwait and Iraq more than offset the loss of Libyan supply (which decreased by 1.2m bpd). For its part, Saudi Arabia exported 2.42bn barrels of crude in 2011 out of a total of 3.31bn barrels produced, up from 2.02bn and 2.89bn barrels, respectively, the previous year.
Of the total crude exported from Saudi Arabia’s shores in 2011, 54.7% was destined for ports in Asia, while 16% was shipped to the US, 7.1% to the Mediterranean, 4.9% to Europe and the remaining 17.3% headed to other markets, according to Saudi Aramco reports. East Asia was also the largest market for refined products, accounting for 54.1% of total exports, with Europe a distant second at 8.1%, the Mediterranean at 2.6%, the US at 0.5% and other markets making up 34.7%.
The Home Front
Sustaining the country’s rapidly expanding population and growing industrial base requires an increasing amount of oil and gas output, both of which contribute significantly to export revenues. Oil consumption peaked at 2.86m bpd in 2011, up 3.7% over the 2.75m bpd consumed the previous year, according to the “BP Statistical Review”, with the MPMR predicting this rate of consumption to double by 2030. Over the past decade, domestic consumption has climbed 76.5%, from 1.62m bpd in 2001 to current levels of around 2.86m bpd.
With much of the country’s crude production tied up in domestic power generation and revenue-generating exports, the country’s refineries do not have enough capacity to meet domestic demand for processed fuels. Imports over the first eight months of 2012 were 8% higher than the same period the previous year, according to data from Jadwa Investment. But with the trio of new 400,000-bpd refineries slated to come on-line over the next five years, this costly trend should be brought into check.” Saudi Arabia has been a substantial net importer of gas and oil for several years, but as Jubail [refinery] is commissioned in 2013, this trend should reverse itself by the end of the year, if not earlier,” Robert Smith, a consultant at Facts Global Energy, told Reuters in December 2012.
Much of this rise in consumption has been fuelled by the building boom that has swept the country over the past decade. Specifically, the air conditioning required in these new buildings (which are powered primarily by oil-burning power plants) accounts for the majority of electricity consumed, while the rapid expansion of car ownership has compounded the problem.
With heavy fuel subsidies that have maintained premium petrol prices of $0.16 per litre, according to an August 2012 Bloomberg survey, fuel-efficient cars are not a priority for most car owners. These subsides cost the government upwards of $61bn per year, according to estimates from the International Energy Agency, and they do not help to encourage efficiency: the Kingdom consumes the most oil per capita of any nation at 35 barrels of oil per person per year. Two primary solutions to the problem – incentivising efficiency (which would require reducing subsidies) and increasing the usage of alternative fuels – are being discussed.
Although Saudi Arabia’s reserves and crude exports have secured its pre-eminent position for some time, it is only recently that the sector has begun moving towards refined fuel self-sufficiency. The country’s refining capacity accounts for 2.3% of the 2011 global total, compared to its 16.1% of the world’s proven oil reserves and 13.2% of the world’s production in 2011. And while production levels have improved nominally, up from 1.81m bpd in 2001 to 2.11m bpd in 2011, according to BP data, these gains have been significantly outpaced by domestic consumption.
In 2011 Saudi Aramco produced 494.66m barrels of refined products, up from 400.78m barrels produced the previous year. Roughly three-quarters of this output was consumed on the domestic market, with 2010 and 2011 refined exports totalling 133.42m barrels and 123.37m barrels, respectively. At end-2011, the firm’s domestic refining capacity stood at just over 2m bpd, split between wholly owned Saudi Aramco refineries (1.002m bpd) and Saudi Aramco JVs (1.005m bpd). More than half of the production of the former is located at the Ras Tanura refinery, with a maximum output of 550,000 bpd. This is followed by the Yanbu refinery at 240,000, Riyadh (124,000) and Jeddah (88,000). JV operations are being led by the 400,000-bpd Petro Rabigh and Saudi Aramco Mobil Refinery and the 305,000-bpd Saudi Aramco Shell Refinery facility.
A dramatic shake-up in the coming years is expected, however, as three new refineries with a total combined capacity of 1.2m bpd are slated to come on-line in the Kingdom by 2017. The first of these is a JV between Saudi Aramco (which holds a 62.5% share of the project) and France’s Total (37.5%) to construct a new 400,000-bpd refinery and petrochemicals complex at Jubail Industrial City II. Slated to become fully operational by third-quarter 2013, the facility will utilise heavy crude oil sourced from the Manifa fields to produce approximately 190,000 bpd of diesel, around 90,000 bpd of petrol and 50,000 bpd of kerosene all of a high enough standard that allows export to strictly regulated markets, including the US, Europe and Japan. Additionally, the plant may produce smaller amounts of heavier industrial fuel in addition to aromatics for industrial use.
The next 400,000-bpd refinery project, scheduled to come on-line by June 2014, is being developed by a Saudi Aramco-China Petrochemical Corporation JV named the Yanbu Aramco Sinopec Refining Company, formerly known as the Red Sea Refining Company. Situated in Yanbu along the Red Sea coast, the refinery will be fed by Saudi Arabian heavy crude oil and will produce a variety of clean fuels of sufficient quality to meet the stringent import requirements of Western markets. With a total investment cost of $10bn-12bn, the facility will boast a capacity of 263,000 bpd of diesel and 90,000 bpd of petrol at full capacity in addition to other byproducts such as petroleum coke, sulphur and benzene. Aramco holds the controlling 62.5% of the company, leaving Sinopec with the outstanding 37.5%.
Scheduled to begin refining operations by 2017, Saudi Aramco’s third and final 400,000-bpd refinery is being constructed at the Jazan Economic City in the south-western area of the country. The project will be fed by Saudi Arabian medium and heavy crude oil to produce transportation fuel and fuel oil that will be targeted to both domestic and export markets.
As global demand for hydrocarbons continues to rebound, Saudi Arabia will keep playing a pivotal role in the international energy market given its huge reserves, growing production capacity and political stability. And while the oil and gas sector will certainly drive the Kingdom’s economy for the foreseeable future, the focus of its core business activities as well as the make-up of its trade partners should continue to evolve. The pace of this transformation should increase in the future as a number of substantial downstream investments and associated petrochemicals plants come on-line with new value-added products.